It is an exciting time at ITW as we proudly celebrate a significant milestone, our 100-year anniversary.

In 1912, Chicago financier Byron L. Smith placed an ad in The Economist looking to provide capital to a "high class business (manufacturing preferred) in or near Chicago." He turned down several initial offers, waiting for the right proposal. He wanted people with high integrity and new ways of doing things, not just those seeking quick profits. When a group of inventors with an idea to improve gear grinding came along, Illinois Tool Works was born. From these humble beginnings, the company endured the uncertainties of wars and recessions, expanded into businesses across the globe and transformed entire industries through simple, yet ingenious solutions. It was no accident. In fact, very few U.S. public companies can claim a century of success.

Now called ITW, the company's embrace of technological change and new markets, insistence on acquiring only "high class" businesses and robust culture of entrepreneurship and innovation has helped stay the course toward profitable growth. Our financial performance in 2011 is proof that these values are still very much alive at ITW and are a key part of how we deliver shareholder value.

STRONG FINANCIAL PERFORMANCE

2011 represented the second year of recovery from the historic recession of 2008 and 2009. ITW generated total revenues of $17.8 billion (15.4 percent growth) in full-year 2011. Organic revenues were up 7.5 percent—above the 5 to 7 percent range we anticipated last year. Our welding, test and measurement and automotive businesses led the way with strong operating results in 2011. The net result was that our income from continuing operations exceeded more than $2 billion and our diluted income per share from continuing operations was 30 percent higher than 2010, excluding a one-time tax benefit recorded in the 2011 first quarter. We also produced solid operating margins of 15.4 percent, 80 basis points higher than full-year 2010.

It was also a year of strong free operating cash flow. Our solid balance sheet reflects judicious and opportunistic use of our cash flow and debt, including $1.6 billion returned to shareholders through share repurchases and dividends. A 6 percent dividend increase was approved in August of 2011, and ITW was again lauded in national financial media as one of America's "dividend aristocrats."1

A TRADITION OF PROFITABLE GROWTH

Throughout its long history, ITW has never pursued growth for growth's sake. Our strong performance in 2011 was due in part to a continued focus on emerging markets that meet our long-term financial metric as well as innovation—organic investments that drive growth at a high rate of return. Ever since Byron L. Smith recognized that ITW's strength lay in high quality, specialized products and solutions rather than mass-produced commodities, we have fostered a culture that nurtures innovation and built our position among the top U.S. companies based on the strength and size of our patent portfolio.

When ITW purchased its first company in 1923—Shakeproof Screw and Nut Lock Company— acquisitions became another important way for us to accelerate growth, generate long-term returns and expand our product mix. In 2011, we completed a number of acquisitions, largely in key platforms. We applied disciplined valuation, choosing businesses with long-term profitable growth potential. Acquisitions such as Despatch Industries, a leader in thermal processing equipment, and SOPUS (now named ITW Global Brands), an auto aftermarket products portfolio, represent larger businesses that possess both solid growth rates and strong operating margins. We also acquired smaller businesses in emerging markets, such as the Brazilian industrial chemical company Archem. In fact, more than 80 percent of our 2011 acquisitions are directly tied to emerging markets and platform-related growth initiatives.

BUILDING SHAREHOLDER VALUE

In 2011, we consistently generated returns significantly above the cost of our investments to achieve a 16.8 percent return on average invested capital (ROIC). But this is only part of how ITW is creating shareholder value. We are also aiming for more profitability by improving the operating margins of these acquired businesses and our base businesses by applying signature ITW principles such as 80/20 and simplification.

But more importantly, ITW's consistently high return on investment and growth drive higher profits, which in turn gives our shareholders long-term value and reward. In fact, over the past 25 years, our strategies have yielded an average 13 percent compounded annual rate of return for our shareholders.

MANAGEMENT DEVELOPMENTS

One hallmark of the few companies that endure 100 years is successful leadership talent and succession. We are proud of our strong track record of leadership continuity. The strategic planning and guidance of highly experienced leaders with long tenures is integral to our longevity and has kept us on the path to profitable growth.

In early 2012, Daniel J. Brutto and James W. Griffith were elected to the ITW Board of Directors. Dan is president of UPS International, responsible for all international package, freight forwarding and logistics businesses, as well as U.S. international package services. Jim is president and chief executive officer of The Timken Company and a member of its board of directors. Both Dan and Jim have a broad range of operational and financial experience that will be an asset to ITW and its Board of Directors. We look forward to their valuable contributions in the years ahead.

We bid a fond farewell to Director Marvin D. Brailsford, who retired in 2011 after 14 years of service to ITW's Board of Directors. We also say goodbye to several dedicated officers who retired in early 2012: Philip M. Gresh, Jr., executive vice president, retired after 22 years of service; Thomas J. Hansen, vice chairman, retired after 31 years of service; and James H. Wooten, Jr., senior vice president, general counsel and secretary, retired after 23 years of service. We appreciate their many valuable contributions to ITW and wish them the very best in the years ahead.

LOOKING AHEAD

We are optimistic that the economic recovery will continue its upward trajectory in 2012, although at a more modest pace. We anticipate challenges in geographies such as Europe, and expect that global economic demand will remain uneven. However, through innovation and applying our toolbox to existing businesses, ITW can further penetrate these slower-growing economies. At the same time, we plan to continue investing in higher-growth platforms and emerging markets. We are committed to a long-term, balanced strategy of profitable growth and strong returns.

As a company that has stood the test of time, we believe we can meet these expectations. The values that formed a small Midwestern tool company a century ago are still with us today: innovation, quality, integrity, and giving back to our communities. Our values and principles have been refined and expanded, but never discarded. We thank the many talented women and men of ITW, past and present, for upholding our values and helping us to reach our 100-year anniversary.

Congratulations to everyone at ITW, all over the world, on our historic achievement. We look forward to a bright and prosperous future for our customers, our shareholders, and our people.